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GOLD: The Fog of War

By John R. Ing
President and CEO,
Maison Placements Canada Inc.

Donald Trump is a fitting leader for our times. The age-old expression “history repeats itself” is appropriate for this leader who seems stuck in a time warp of the glorious 1960s or the nostalgic 1950s. Yet, this president has little patience for his country’s history nor its founding. America it seems, lurches from one crisis to another. Too many times there has been a blurring of roles and even high school students can recite more of the founding, separation of powers and rule of law than the current occupant in the Oval Office.

The risk of a US recession next year is rising fast. While periods such as the Vietnam War, Smoot-Hawley Tariffs or in particular, the hyperinflation of the 1970s are relegated to the history books, many, including President Trump forget that the hyperinflation of the 1970s was caused by a six fold increase in the price of oil, which caused huge deficits when the Fed boosted money supply to improve the election chances of a president. Paul Volcker needed to double interest rates to 20 percent to end the hyperinflation and restore faith in the greenback. But decades later after the 2008 financial crisis, central banks’ balance sheets bloated with debt purchased to keep interest rates low, are again goosing the economy. For the first time ever, the federal government has spent more than $3 trillion in the eight months of the fiscal year, an outlay of 9 percent more than a year ago.

As a consequence, the US debt burden at $22 trillion is the highest in the world, increasing 43 percent over the past decade, with a deficit expected to top $1 trillion this year and interest payments at half a billion a year. History has shown, time and time again, that each big inflation started with a massive expansion in the quantity of easy money. Today, we’ve had a decade of a massive expansion in money to finance a system that benefited governments and Wall Street, but growth remains elusive.

Trumponomics

Yet, Mr. Trump has made the stock market a reflection of his political success, seeking to influence the market for political gain through tweets and social media including browbeating central bankers. And while his claims are often dubious, what is clear is that his message resounds with a political base which will ensure yet another term. On the other hand, global stock markets shed more than 6 percent in May, as Mr. Trump weaponized everything from sanctions to tariffs to the greenback to make America Great Again. The problem is that Trumponomics echoes the blunders of the 1930s, as trade frictions fuel a slowdown in spending by business and consumers, two main drivers of the US economy.

America’s manufacturing industry has suffered the sharpest slowdown since the depths of the financial crisis under the weight of the US initiated tariff battles with China, Canada, Europe and Mexico. Trump’s tariff war and brinksmanship has morphed into annual deficits of a trillion dollars, leaving little room for the expected dose of government spending needed to fight an inevitable “Made in America” recession.

Only a year after Hollywood profiled Dick Cheney and America’s spiral into a disastrous war with Iraq in 2003 on the pretense of looking for weapons of mass destruction, history looks as if it's to repeat itself. President Trump’s attempts to remake the world order and escalate tensions with China with higher and higher tariffs, is another reminder of how governments can unfailingly pursue a path of good intentions, whose consequences end in war.

The consequences of earlier decisions still linger, considering that the Iraqi war unleashed a geopolitical downward spiral in the Middle East which sharply divided America, its allies and cost over $3 trillion. America always had allies. The Persian Gulf War in 1991, for example was led by the Americans with a broad international “coalition of the willing”, driving into Iraq from Kuwait. The second, Iraq war in 2003 included Britain, Spain, Australia and Poland. Today, Mr. Trump has sent an aircraft carrier and more troops to the Persian Gulf, withdrew US personnel from Iraq and scrapped the nuclear deal with Iran, threatening even more sanctions but this time, America is alone.

U.S. and China – the Technological Curtain

That is not all. In escalating the trade battle only days after he slapped tariffs on $200 billion worth of Chinese goods, Trump has upped the stakes despite trade between America and China topping $2 billion a day, and reversed a two decade relationship between China and America that started when Republican President Nixon went to China in the 1970s. Trump’s latest move plunges the world into a technology cold war, accentuating a schism already opened up by the trade war. It is not about tariffs but long term economic dominance.

Unfortunately, the more this president deploys the weapons of economic destruction, the higher the cost will be felt for years and decades to come. Blacklisting Huawei Technologies was the latest salvo in the looming technological cold war, which is designed to constrain China and its gigantic tech companies. The US was the biggest beneficiary of global free trade, having dominated interactive commerce over the postwar period. America is now erecting a technology curtain which will isolate America by splintering the internet, slow technological advances making Chinese companies more self reliant needing American technology and sales less. Huawei will find alternatives to Qualcomm’s chips or Google’s android system. Markets too have fragmented. And, in building a wall of export controls, tariffs and sanctions, Chinese companies will become more innovative and self reliant not requiring American chips, technology or most important, profits. American suppliers are to be the collateral damage as are its farmers.

History shows that tariffs are a tax on consumers and businesses. Mr. Trump is betting that the United States can withstand the pain of a prolonged economic standoff despite America’s farmers, businesses and his own Republican party’s reluctance and the need for a second round of multi-billion dollar bailouts to US farmers that surpassed the Wall Street bailouts in 2008. Tariffs, immigration and weaponising even the executive branch are central to this president’s 2020 bid for re-election. It is all about the base.

Consider that in one stroke, American companies could find themselves frozen out of a market of $1.3 billion people. Meantime, China’s “Made in China 2025” or Belt and Road initiative already aims to increase materials and components that are produced domestically to 40 percent next year and by 70 percent in 2025. The decoupling of China and the US would see the formation of two distinct and very expensive tech supply chains. China also has other cards to play. It is the world’s largest supplier of rare earth metals, used in smartphones, electric vehicles and wind turbines, accounting for some 90 percent of the world’s production and almost all of the United States’ imports, necessary for America’s billion dollar weaponry.

China has almost 30 years of double digit growth and will grow at 6 percent or 3 times that of America’s economy. China’s exports are less than 20 percent of their GDP with exports to the United States at less than 20 percent. China’s exports are largely within the East at close to 60 percent so the tariffs will not be as painful as this nostalgic president hopes. And of course the world’s largest consumer of energy could similarly reduce its reliance on US energy, currently at 4 percent of China’s total imports. China’s President Xi Jinping recently reminded his people that they are playing a long game and are, “on the new long march, we must overcome various major risks and challenges from home and abroad”. On the other hand, Mr. Trump says that trade wars are “easy to win”. One of those leaders will prove to be wrong.

U.S., China and the Thucydides Trap For some time we have been concerned that the US is falling into the “Thucydides Trap” coined by Professor Allison of Harvard, who noted that in 12 of 16 instances over the past 500 years, when a rising power threatened to replace the incumbent power, they ended in war. In pushing for the mastery of the century, Mr. Trump should remember that those who cannot learn from the past, are doomed to repeat it.

And by treating former friend and major trading partner, as an enemy and by similarly threatening Iran, America has opened battles on two fronts, Military tactics 101 suggest that is foolhardy and Mr. Trump should read the ancient Chinese military strategist, Sun Tzu’s “Art of War” instead of his “Art of the Deal”. The ancient Chinese text written over 2,000 years ago addresses issues today and are as relevant now as they were in Sun Tzu’s days. For example, Sun warned, “You do not win in battle the same way twice”.

The Smoot-Hawley Act of 1930 imposed 900 import tariffs and was blamed for worsening the Great Depression. Canada and Europe in tit-for-tat fashion retaliated and the stock market crashed with millions unemployed. Franklin Roosevelt’s New Deal subsequently lowered the draconian tariffs and subsequent free trade brought about prosperity for half a century, until now. As Donald Trump escalates the tariff war, he should look to history and take heed of the Smoot-Hawley’s cautionary tale.

Sun Tzu also wrote, “I have heard of war being waged with foolish haste but never seen a war skillfully prolonged. No state has every gained from a protracted war.”

Mr. Trump’s trade war with China is now one year old.

Does U.S. Debt Matter?

Today debt and deficits have become structural in nature. We believe that the extraordinary levels of debt by central banks and the governments are the source of our problems. Since the financial crisis, the Fed and European Central Bank (ECB) have cut interest rates to near zero, spending $5 trillion and $3 trillion respectively in a bond buying spree which fueled dramatically higher prices for assets ranging from equities to real estate as investors chased yield.

For many, the worst financial crisis was the subprime mortgage implosion in 2008 when derivative instruments of mass destruction precipitated the biggest global financial crisis, exposing the vulnerability of America’s financial system. While the fallout from the 2008 crisis is over, the world economy has not reached the previous highs but debt levels are higher and poised again to burst. At the same time, the tariff war have caused the disintegration of globalism, leaving central banks little room to manoeuvre particularly with interest rates stuck near zero.

Inflation Is a Monetary Event

Less well appreciated is that many have written the obituaries for inflation. Inflation is dynamic. Professor Milton Friedman taught that inflation is always a monetary event. Today with the strong dollar up 20 percent since 2014, foreign goods are cheaper for Americans. However, tariffs are now expected to reverse that trend. And despite the presumption that the central banks will do whatever it takes to avoid a downturn, the market value of global negative yielding sovereign debt has topped $12 trillion, doubling since last fall. Investors are prepared to pay to lose money for the privilege of sheltering capital. Others are taking on more risk by chasing longer maturities in the hunt for yield, a reflection of the late cycle, because there are fewer and fewer places to hide. We believe that as in the past, inflation is rooted in the growth of the money supply, and that negative yields signal that capital markets are entering a new phase. Simply there is too little return, for too much risk.

Almost 100 years after the German hyperinflation, the Weimar period still affects the memory of many Germans and Europeans. In fact, the start was much earlier when gold convertibility was ended in 1914. As a consequence, there was staggering increases in money inflation as the world economy slowed in 1920 and 1921. The German central bank reduced interest rates during the war years, with money supply increasing a thousand percent. Prices initially did not go up much so the central bank thought that inflation was not a problem.

But, inflation soon accelerated to double digits, then triple digits until mid-1919 to 1923, when money became worthless. In November 1923, hyperinflation took over. One dollar was worth 4.2 trillion marks versus 42 marks in January 1920. The mark’s value fell so rapidly that wages were paid daily and many merchants preferred to barter for goods rather than accept cash. However a new currency was formed in November 15, 1923, at the rate of 1 trillion to one and a year later, inflation died.

The point is that inflation is always with us and despite the illusion of low inflation, today we have asset inflation. Scratch a little deeper, we have inflation in the stock market, condos, classic cars and government spending. Some time, it is dormant and other times, buoyant. Hyperinflation is even with us today in Venezuela, Turkey, Iran, and Argentina. Moreover, the resultant tower of debt has coincided with a deterioration of credit standards, record leverage and an increase in systemic risk. As a consequence, risk has been mispriced and capital misallocated. History shows that events similar to the new cold war between the US and China, or a Brexit or a sovereign debt failure are the very ingredients that can cause a major repricing of risk.

In The Dollar We Trust

Once before British pound was the world's reserve currency because of Great Britain's rapid industrialization and growing empire. However, with the onset of the Second World War, Great Britain lost its dominance as the world’s leading power as its debts piled up and the pound was weakened by Britain’s financial losses. The US subsequently became the world's biggest economy and US dollars became plentiful, replacing the pound as the world's reserve currency.

The US dollar is the linchpin of the world monetary system. The narrative over the past half century is that the dollar’s reserve role allowed the US to live beyond its means and run up huge deficits which ballooned the national debt. That exorbitant right enabled the government to create money to pay their bills without a price. Central banks throughout the world hold dollars as the most important part of their monetary reserves, underpinning their own currencies and in fact, banking systems. However, in the past decade, the dollar boom has been climbing at spectacular rates due to the record debt binge which has left US debt at $22 trillion or more than 100 percent of the nation’s output, a level not seen since World War II. Consequently, the world is awash in dollars, which is seldom appreciated because the dollar reigns supreme in global finance. However, the underlying picture is more worrying because there is a growing gap between US dollar liabilities and the US dollars that have accumulated. This mismatch is unsustainable.

While, the twin US deficits – fiscal and current account deficits are a good lead indicator of dollar weakness, the ratcheting up of tariffs on China, Canada, European Union, Mexico, South Korea and Japan undermines its currency. India is a new addition and the list goes on. While Mr. Trump is hell-bent on making America Great Again, he needs to analyse what made America great in the first place.

Trump’s Trade War Morphs Into a Currency War

Today the dollar’s reserve role is being questioned. And, with each Trumpian tweet, sanctions or tariff, he undermines trust in the dollar and in subverting America’s institutional structure, encourages others to look for alternatives. The threat of US imposed sanctions on Iran, as an example, pushed the European Parliament to seek alternatives to bypass America’s reach. Europe created a system (Instex) to enable their companies to avoid using dollars. India, a big consumer of Iranian oil has devised a similar alternative system to work around America. China and Russia are swapping goods for ruble and renminbi instead of using the American denominated SWIFT payment system. China too has pushed its neighbors for more usage of the renminbi with currency swaps in an effort to create a multi-polar reserve system. The Shanghai London Stock Connect was launched, a two-way depository receipt mechanism linking the world’s largest domestic capital markets, deepening the renminbi pool and lessening the role of the dollar. Facebook is even launching a new “Libra” cryptocurrency next year.

The US is no longer the center of the world and their consumption-based economy is laboring under the weight of the higher tariffs. Nearly every policy is seen through a tariff prism. All of this is hurting economic growth and investment. Falling bond yields are signalling a growth slowdown and an inverted yield curve is a prelude to a recession. America is simply imploding, not dissimilar to Great Britain after the Second World War. Mr. Trump has sown the seeds of the dollar’s demise.

China’s Nuclear Option

Investors fear that China’s nuclear option of dumping their $1.1 trillion worth of US Treasuries will cause an increase in rates and plunge America into a fiscal crisis. China has been gradually reducing its Treasury exposure. Investors are misguided, not in the dumping of debt, nor in the increase in rates but that China’s real nuclear option is to weaponize the renminbi’s exchange rate and let the renminbi slide which would spark a competitive currency war.

Ominously, the renminbi has reached a six month low, threatening to break “seven”, (RMB 7 per dollar) a level of weakness reached in the financial crisis in 2008. To be sure, a Chinese devaluation would lessen the tariff blows by making their exports more attractive. But devaluation is not a zero sum game since every other exporting country would be compelled to follow suit and devalue their currency to maintain exports in a race to the bottom. Devaluations would also lead to an outflow of foreign money seeking a safehaven.

Of concern is that a beggar-your-neighbour devaluation helped turn the depression in the 1930s into the Great Depression as one country after another pushed its exchange rate downward, in an effort to export its way out of the depression. Then the major economies introduced draconian tariffs that slowed the global economy and the descent into protectionism put the “Great” into the Great Depression. In the end, no one had an advantage.

Currently, the US dollar enjoys a period of strength as a safehaven among the tariff wars. However, there are growing concerns that the dollar is a crowded trade. The implications are far reaching. The global monetary edifice is founded on a strong US dollar that has led to lower inflation, strong US exports and manufacturing.

What would happen if that came to an end? A currency cold war could change that. The fight with China started with trade deficits but could end with China moving its free floating currency lower. The US would have to follow as would the world’s other currencies in rounds of competitive devaluations, reminiscent of the Great Depression.

In The Beginning, There Was Gold

Also in the Thirties, the gold standard broke down as countries engaged in rounds and rounds of competitive devaluations. Subsequently in the 1940s the Bretton Woods system established a new multi-lateral international monetary system with rules, the World Bank, and procedures to regulate commercial and financial relations among 44 countries. The US dollar was tied to gold, becoming the benchmark for which other currencies fixed their exchange rate. However, that ended in 1971, when President Nixon devalued the dollar and severed the gold link between the dollar and gold.

Currencies then floated, deficits soared and the US went on a spending spree helping cause the worst inflation in recent history. Gold went from $35 an ounce to more than $800 in the next decade. We believe that the present dollar exchange system of floating non-convertible currencies is ending. Without confidence in the dollar, the world has no valid reserve currency. Today we have come full circle but this time, a return to a gold standard might not come soon enough.

At the very least, a gold standard is the logical solution to take control of the money supply away from the central bank and a new Bretton Woods-style agreement replacing the current flexible currency regime with an asset backed currency, like gold is needed as part of a new monetary era. Ironically, Mr. Trump in stacking the Federal Reserve with nominees of whom he supports, some are sympathetic to a return and discipline of a new gold standard.

A Golden Life Preserver

A third of America’s hefty government debt is financed by foreign investors which needs to be continuously rolled over. The United States is running a huge risk relying on the sustainability of their profligacy. Rather than dump their $1.1 trillion of Treasuries, as Russia has done, China, the largest foreign creditor to the US government could easily abstain from regular auctions because they already have too many dollars. They are sitting on the world’s largest stockpile of foreign exchange reserves at $3.1 trillion dating back when the Peoples Bank of China (PBoC) bought dollars from their exporters in exchange for renminbi to avoid appreciation of their currency. However that ended in 2016, when China surpassed Japan as the largest foreign holder of US debt.

Today after a sequence of events beginning with the wars in the Middle East, continuing with the Trump tariffs, sanctions and unilateral abrogation of agreements, America’s allies no longer trust the United States. What damages trust in the US, damages the whole world. Investors are left wondering whom they could trust. The US government must borrow $1 trillion to finance its widening deficit and without China and foreign investors, the government would need to offer higher rates. Of concern is that a $27 billion auction of 10 year notes almost failed as covered bids were only 2.1 times the amount offered, the lowest coverage since March 2009. With total debt at $22 trillion or 100 percent of GDP, who will buy America’s debt? What happens if China decided to follow Russia and unload its hoard of $1.1 trillion of Treasuries? What if the Fed were to hold another bond auction and nobody showed? Notably, China’s absence this time is a warning. We also believe a trade truce is unlikely to change the political calculus in Washington. The United States is divided, its currency is vulnerable and dependant upon the international community to tolerate a very unhealthy balance of payments. Under these circumstances, two-thirds of the world’s assets are denominated in a fiat currency issued by a profligate country set on debasing their currency. We thus believe current Treasury offerings are unsustainable because the world’s biggest economy cannot fund itself. History shows that when nations are in trouble, they extricate themselves by stealth debasements through inflation.

Gold has been a disappointment for much of this year, but its weakness does not tell the whole story. Future contracts are influenced by short term factors and for the past few years, billions of paper ounces have been dumped on the market, depressing the gold price. However longer term contracts term were unaffected implying an extremely tight physical market. In fact, the reality is that the Chinese, through the Shanghai Gold Exchange have been the biggest buyers of physical gold, sopping up each available ounce. In May, China added 16 tons, its biggest monthly increase since January 2016. There is a battle between the tightness of the market and futures. We believe that the physical market will win out because of the lack of mine supply, growing central bank demand and a vulnerable US dollar.

In weaponizing the dollar, America undermines the dollar’s role. Its recent isolationist stance and reckless fiscal policies also increases the risk of holding dollars. One consequence is that global central banks have been purchasing gold at the highest rate since 1971, reducing their exposure to the US dollar. Already, among the top six largest holders of gold, the central banks of Russia and China have been steady buyers of gold every month this year. Central banks are the largest holder of gold, an alternative to the dollar.

Gold has lagged most markets because the dollar has been a safehaven choice over the past decade. What happens when investors discover that their life preserver can no longer save them? To be sure the breakout beyond $1,300 an ounce is an encouraging sign. Gold has tried to break the $1,350 level five times and was finally successful in breaking out. With an interim target at $1,700 an ounce, gold is a barometer of investor anxiety. We continue to believe gold will hit $2,200 within 18 months.

Gold’s bull market has just begun.

Recommendation

Gold equities performed better of late as gold skyrocketed to new highs, breaking through the $1,350 an ounce resistance level that existed for almost six years. Gold shares are transitioning from the difficult period of repairing balance sheets to active mergers and acquisition activity on the heels of Barrick's acquisition of Randgold and Newmont's purchase of Goldcorp. Organic growth has been difficult for many and consolidation in the mining business made sense since it is cheaper to buy ounces on Bay Street. All-in-costs has been creeping upward, hurting margins.

We believe that gold prices will go higher given the lack of discoveries and the long lead time to develop and build mines today. This year there are only a handful of new mines expected to open including Agnico Eagle’s Meliadine, McEwen’s Gold Bar in Nevada, the expansion at Sabina and Victoria Gold’s Eagle project in Yukon. As such we remain positive on gold as a hedge against US dollar vulnerability and believe that the senior and intermediate producers with free cash flow and dividends will play an important role in portfolios.

We also believe an over-weighted portfolio position is appropriate at this time. We continue to like Barrick as the go to senior, Agnico Eagle for their execution among the seniors, and B2Gold as a growth vehicle. While, there are a number of gold miners who have yet to join the wave of mergers that is reshaping the sector, some have long term problems. For example, oft mentioned merger candidates, Yamana, Kinross and Iamgold have a host of problems and mergers for the sake of size may not be beneficial for an acquisitor. Kinross for example is hurt by the deadlock with Mauritania's government and its healthy exposure to Russia. Yamana is plagued by $1.6 billion of debt. The industry, burned by expensive writedowns in the last cycle is more cautious this time. For the juniors, the Index ETFs, have made it difficult as most investor attention has gone to the mid-caps.

Smaller miners and explorers are suffering due to the lack of capital. Well financed Osisko’s Windfall project or Aurania’s Lost Cities projects are ones to watch, however. While this sector is an exciting place, only a skookum-type discovery will attract investor interest.

Agnico Eagle Mines Limited (AEM) – Agnico Eagle had a strong quarter. Agnico Eagle brought the Meliadine operation in Nunavut into production in May which will produce 230,000 ounces this year. Mill throughput is expected to average 3,000 tons per day and the plant operated as high as 3,700 tons per day on several occasions. Meliadine came in under budget reflecting Agnico Eagle’s strong execution capability. Agnico Eagle will produce about 1.8 million ounces this year and spend about $600 million. Agnico Eagle acquired the Rand Malartic property adjacent to Canadian Malartic, as that company expands its exploration exposure along the prolific Cadillac-Larder border. Agnico Eagle has an excellent pipeline of projects and reserve potential. Agnico Eagle is one of the few producers to replace their gold reserves last year from eight operating mines in Canada, Mexico and Finland. Meliadine and the Amaruq project are on schedule to help Agnico Eagle produce 2 million ounces in 2020. We like the shares here. • B2Gold Corp. (BTO) – B2Gold had a strong quarter and is one of the fastest-growing gold miners, reflecting a strong quarter from Fekola, its newest flagship mine producing 430,000 ounces last year at AISC of only $533 an ounce. Already there are plans to expand Fekola. Fekola in Mali is a high-grade producer and contributions from Otjikoto in Namibia, Masbate in the Philippines, La Libertad and El Limo in Nicaragua should produce almost 1 million ounces this year. Noteworthy is that the company generated free cash flow of about $30 million dollars and possesses a strong balance sheet after the Fekola build out. We expect B2Gold to be an active player in the M&A game because of its production base, growing cash flow and quality management team. We like B2Gold here.

Barrick Gold Corp. (ABX) – Barrick and Newmont's joint venture partnership has taken shape making the new Nevada Gold Mine, the fourth largest gold producer in the world. The consolidation of the assets gives Barrick 61.5 percent and Newmont the remaining 38.5 percent. Importantly, the consolidation allows Barrick freedom not to spend a billion dollars for a new roaster as they can send ore to Newmont's facility. The JV will allow more integrated mine planning, G&A savings, supply chain and fleet synergies. In an effort to resolve the Tanzanian government deadlock, Barrick has proposed to buy out the remaining 36 percent of shares in Acacia for $285 million. The offer is a takeunder and has not generated much of a buzz because of the low bid. However, by cleaning up the remaining shares, Barrick will have the flexibility to resolve the longstanding dispute with the Tanzanian government. We continue to like the shares for its major exposure to Nevada, Africa and South America together with an excellent management team.

Centerra Gold Inc. (CG) – Centerra has two major assets, Mount Milligan in British Columbia and the open pit Kumtor in the Kyrgyz Republic. Centerra generated free cash flow in the quarter but its shares will remain under a cloud because while Kumtor mine in the Kyrgyz Republic is an excellent asset, chronic government negotiations over the Strategic Agreement remains a problem. Centerra is building the Öksüt mine in Turkey, a heap leach mine with an eight year life which is half complete. Öksüt should be in production by early next year at a capital cost of $220 million and produce 119,000 ounces annually. Centerra has some solid assets but the ongoing problems in the Kyrgyz Republic is a cloud over its prospects. The good news is that water does not appear to be a problem this year at Mount Milligan. As for Kemess, the project is too far off and capex heavy to be included in our valuation. Although Centerra is expected to produce about 700,000 ounces this year, we prefer B2Gold here.

Eldorado Gold Corp. (ELD) – Eldorado is a mid-tier producer that reported a poor quarter due to delay in sales at the Efemcukuru mine in Turkey. The delay was due to a contract dispute and delays at the port. Eldorado reopened mining and heap leaching at former flagship Kisladag in Turkey and has begun loading ore on the heap leach pad again. At Olympias in Greece, Eldorado reported that performance has improved. Lamaque achieved commercial production in March will produce 125,000 ounces next year. As for Eldorado’s other Greek assets, a stalemate with the government sees investors hoping for a change in government and policies to break the logjam. Eldorado has almost 24 million ounces on reserves but permits are needed to exploit those resources. Noteworthy is that Eldorado still has a debt problem with $600 million in notes due next year, and only $220 million on hand. We prefer B2Gold here.

Iamgold Corporation (IMG) – Iamgold had a disastrous quarter due to start up problems at Westwood in Quebec due to poor ground conditions which affected production. Westwood has reduced their workforce as they try to get a handle on costs and a new mine plan is expected. Also costs increased at Rosebel and Essakane. Although, Iamgold should produce about 850,000 ounces at a cash cost of about $800 an ounce, all-in-costs are quite high. While the balance sheet has $400 million of cash, Iamgold's problem is the lack of growth. After releasing plans to spend a billion to bring Côté Gold into production, Iamgold did an about face and shelved the low grade project despite attracting partner Sumimoto Metal to purchase a 30 percent interest and entered into a $170 million gold forward sale. Of interest is that Iamgold still includes Côté Gold in their reserves. We believe Côté’s problem is continuity and a new plan is needed. Iamgold had purchased Trelawney’s Côté project for $600 million and spent millions in development.

With Côté shelved and Westwood in a turnaround state, there is little on the horizon, including a potential M&A workout. Iamgold has retained bankers to optimize value but we believe the prospect of lack of growth and stubbornly high costs will limit interest. The shares have bounced on rumours after losing half of its value this year. Although China National Gold is rumoured interested, we do not believe that the Chinese would spend a couple of billion dollars to buy a money losing miner with little growth prospects. Sell.

Kinross Gold Corp. (K) – Kinross reported a good quarter producing 600,000 ounces with contributions from Tasiast in Mauritania and Paracatu mine in Brazil. Kinross is again working on the Tasiast phase 2 expansion plan but huge capital outlays as well as unsuccessful negotiations with the Mauritanian government who recently change the tax code, negatively impacts the outlook. La Coipa/Lobo-Marte in Chile capex remains healthy with a near billion dollar price tag, which is a nonstarter in the current environment. Fort Knox in Alaska production was lower due to the pit wall slide and high costs. Round Mountain Phase W development is positive, however. While often mentioned as a suitor, Kinross is stymied by its heavy Russia exposure, and albatross-like Tasiast operation. We prefer Agnico Eagle or B2Gold here.

Newmont Goldcorp Corp. (NGT) – Almost before the ink dried on Newmont’s acquisition of Goldcorp, Newmont was forced to shutdown flagship Penasquito in Mexico because of a protracted illegal local blockade. Penasquito represented almost 45 percent of Goldcorp’s NAV and the Pyrite Leach Expansion was to be a big contributor. After 49 days, Newmont resumed operations and ramped up operations. The next shoe to drop is the announcement regarding Newmont cleaning up Goldcorp’s Canadian operations, starting with underperforming Eleonore in Quebec and the Coffee project near Dawson which will likely be put on the backburner. Also, Newmont has identified almost $400 million in efficiencies and productivity improvements which is optimistic. Asset sales are likely as Newmont attempts to extract value from the Goldcorp acquisition. We prefer Barrick since Newmont will be slicing and dicing for the next few years. With 90 percent of their reserves in America and Australia, Newmont should produce about 5.2 million ounces this year but output will be lower at 4.9 million ounces next year.

Editor’s Note: John Ing is President & CEO of Maison Placements Canada Inc. Mr. Ing has over 45 years of experience as a portfolio manager, mining analyst and investment banker. Maison Placements Canada Inc. is an institutional investment boutique that provides financial services to corporate, government, institutional, and individual investors. The firm offers securities underwriting, distribution, and execution services. Additionally, it provides investment banking services including mergers, acquisitions, and divestures; equity financing; financial and corporate restructuring; valuations; fairness and regulatory opinions; and management advisory. For more information on Maison Placements Canada, visit www.maisonplacements.com.

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